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With real estate values reduced across the country, many homeowners are finding that their home value is actually less than what they owe on their mortgage. If you are one of these homeowners with an “upside down” mortgage, fear not. Though having negative equity in your home can put you in a precarious position, there are options for you.

How Did this Upside Down Loan Happen?

What causes negative equity in a home? Negative equity occurs when homes are leveraged at or near their full value, and a homeowner has one or more loans equaling at or near 100% of the home’s value. Though home values, on average, appreciate at about 3% to 5% per year, there may be times when values fall. This is what we have seen in America over the last few years due to the “real estate bubble” effect where homes were being sold for much more than 5% appreciated yearly value. In some places, homes appreciated as much as 100% within a year’s time. Falling home prices means that real estate values are simply resuming their average appreciation values and will rise again at some point.

What Are My Options for Managing an Upside Down Loan?

When you, as an owner, experience a falling home value, it is easy to have an upside down mortgage if your home is 100% leveraged in loans. The best strategy, however, is to keep paying your mortgage obligation. Continuing to pay your mortgage keeps you in good standing with your lender.

Another strategy is to refinance. Many homeowners found “great deals” on adjustable rate mortgages (ARMs) where they were offered low introductory rates, and after a few years, the interest rate skyrocketed – along with their mortgage payments. If you are upside down in your current mortgage and wish to refinance, you will most likely be required to pay down the balance of the loan so that it is once again below the appraised value. However, by refinancing, you can get a better and more affordable monthly mortgage payment.

In an extreme case, you may have an upside down loan and are unable to make your monthly mortgage payment or refinance. What should you do? Should you walk away from your home and allow the lender to foreclose? Though that is an option, it may not be the best. If you foreclose, it will show on your credit record for years to come and prevent you from getting another home loan.

If you are in a desperate situation and behind on your mortgage payments, ask your lender about a “short sale,” which means the lender will accept whatever the home is sold for and write off the balance of the loan. It may be a better option than foreclosure for both parties. Though you walk away with no home, you save yourself from having credit issues for the next seven to eight years.

This article is intended for general information. Always seek sound financial and legal advice before making any financial decision.